SEC Proposes Permanent Rule Requiring Municipal Advisors to Register With Agency
The Securities and Exchange Commission has voted to propose a rule creating a new process by which municipal advisors must register with the SEC.
The proposed rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would supplant a temporary rule the Commission adopted in September. Because the Act required that these advisors register by Oct. 1, 2010, the Commission adopted its earlier temporary rule on an interim basis so that advisors could fulfill the Act's mandates.
Municipal advisors provide advice to state and local governments and other borrowers involved in the issuance of municipal securities or with respect to the investment of governmental monies. Municipal advisors also solicit business from a state or local government for a third party. Subject to certain exemptions, the definition of municipal advisor under the Dodd-Frank Act includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and certain swap advisors that provide municipal advisory services.
Under the proposed permanent registration regime, municipal advisors would have to submit more detailed information than is currently required and certify that they have met or will meet the qualifications and regulatory obligations required of them.
In particular, the proposed rule would require:
Like the temporary form required of municipal advisors (Form MA-T), the registration forms envisioned by the proposed rule would require municipal advisors to provide identifying and contact information, and to disclose — by selecting from a list — the municipal advisory activities in which they engage.
Municipal advisors also would be required to provide disciplinary history information similar to the information that the SEC obtains from registered broker-dealers and investment advisers. Individual municipal advisors would be required to amend the form whenever any of the required information has become inaccurate in any way; and municipal advisory firms would be required to amend the form annually, and whenever identifying and contact information or disciplinary information has become inaccurate.
Municipal advisors can continue to access and complete the temporary registration form (Form MA-T) on the SEC's website. Information filed by municipal advisors on Form MA-T is made publicly available on the SEC's website. In addition to registering with the SEC, municipal advisors also must register with the Municipal Securities Rulemaking Board (MSRB). Information about MSRB registration is available at: http://www.msrb.org/Rules-and-Interpretations/MSRB-Registration.aspx.
Public comments on the proposed rule should be received by the Commission within 45 days of publication of the rule in the Federal Register. The temporary rule will expire by no later than Dec. 31, 2011.
Under the Dodd-Frank Act, the Commission has been engaging in significant rulemaking — some of which includes:
Securities and Exchange Commission Orders Hearing on Registration Revocation Against Seven Public Companies for Failure to Make Required Periodic Filings
On December 17, the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of seven companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the seven issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the Administrative Law Judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-63570; File No. 3-14164)
Initial Decision Revoking Registration of Securities Issued by The Colonial Bancgroup, Inc. Declared Final
The Commission has declared final the decision of an administrative law judge revoking, pursuant to Section 12(j) of the Securities Exchange Act of 1934, the registration of all classes of securities of The Colonial Bancgroup, Inc. (Colonial). The law judge found that Colonial had not filed an annual report on Form 10-K since March 2, 2009 and had not filed a quarterly report on Form 10-Q since May 8, 2009. (Rel. 34-63577; File No. 3-13967)
In the Matter of Daniel Spitzer
On December 17, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940 and Notice of Hearing (Order) against Daniel Spitzer (Spitzer) based upon the entry of a Permanent Injunction entered against him in the United States District Court for the Northern District of Illinois (SEC v. Daniel Spitzer, et al., Civil Action No. 10 C 3758).
In the Order, the Division of Enforcement alleges that on December 6, 2010, the United States District Court for the Northern District of Illinois entered a final judgment against Spitzer, which, inter alia, permanently enjoined Spitzer from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-8 promulgated thereunder.
A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations contained in the Order are true, and to provide the Respondent an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest.
The Order requires the Administrative Law Judge to issue an initial decision no later than 210 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rel. IA-3124; File No. 3-14165)
In the Matter of Moore Stephens Wurth Frazer & Torbet LLP and K. Dean Yamagata, CPA
On December 20, the Securities and Exchange Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Moore Stephens Wurth Frazer & Torbet LLP (MSWFT) and Kerry Dean Yamagata.
The Order finds that Respondents Yamagata and MSWFT engaged in improper professional conduct and violated the document retention and auditor independence requirements of Regulation S-X, in connection with annual audits and quarterly reviews of the 2004 and 2005 financial statements of China Energy Savings Technology, Inc. (China Energy), a U.S. issuer with operations in China. The Order further finds that although Respondents determined that the China Energy engagement involved high risk, they did not exercise professional skepticism and due professional care. The Order finds that Respondents violated applicable professional standards by: (i) failing to obtain sufficient competent evidential matter regarding China Energy's revenues to afford a reasonable basis for MSWFT's opinion regarding the company's financial statements for fiscal year 2005; (ii) failing to exercise professional skepticism and due professional care regarding revenues in the performance of the audit of China Energy for fiscal year 2005; (iii) failing to document significant findings or issues, actions taken to address them, and the basis for the conclusions reached in the fiscal year 2005 audit; (iv) failing to properly supervise assistants, including assistants engaged from outside the firm, in the fiscal year 2004 audit of China Energy; and (v) failing to ensure the independence of MSWFT in connection with the audit of China Energy's earnings per share calculation in fiscal year 2004.
Based on the above, the Commission's Order censures Respondent MSWFT and denies Respondent Yamagata the privilege of appearance and practice before the Commission as an accountant with the ability to request that the Commission consider reinstatement after two years. In addition, the Order requires the Respondents to disgorge $100,000 in audit fees and $29,500 in prejudgment interest.
Under the Order, MSWFT undertakes to retain an independent consultant to review and evaluate the firm's audit and interim review policies concerning, among other things, client acceptance and retention, auditor independence, document retention, use and supervision of affiliate firms and personnel in other jurisdictions, and training in the detection of client fraud. MSWFT has also undertaken that the firm will not accept any new clients with operations in China until all of the consultant's recommendations have been adopted. Respondents consented to the issuance of the Order without admitting or denying its findings.
This is the Commission's fourth enforcement action concerning the China Energy fraud. For further information, see Litigation Release No. 19933 (Dec. 4, 2006); Admin. Proc. 34-54881 (Dec. 6, 2006); Litigation Release No. 21621 (Aug. 6, 2010). (Rels. 33-9166; 34-63579; AAE Rel. 3221; File No. 3-14167)
In the Matter of Milan Belans, CPA
The Securities and Exchange Commission announced that on December 20, 2010, it settled pending charges against Milan Belans, the former Director of Capital Planning, Structured Finance and Pension Analysis at Delphi Corporation (Delphi).
Belans consented to the entry of an injunction from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. Belans also consented to pay disgorgement of $17,835, together with prejudgment interest thereon in the amount of $13,865, and a $55,800 civil money penalty. In settling the Commission's claims, Belans neither admitted nor denied the Commission's allegations. In addition, separately, without admitting or denying the Commission's findings, Belans consented to the institution of settled administrative proceedings pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant, with a right to apply for reinstatement after five years, based on the entry of the injunction.
The Commission's Complaint against Belans alleged that Belans engaged in three fraudulent schemes which resulted in Delphi filing materially false and misleading financial statements in the company's quarterly report on Form 10-Q for third quarter 2000, and on the company's annual report on Form 10-K for the fiscal year ended December 31, 2000. According to the Complaint, Belans assisted Delphi in falsely accounting for $202 million of a $237 million warranty settlement as pension and other post-employment benefit (OPEB) costs. In addition, according to the Complaint, Belans assisted Delphi in improperly accounting for a financing transaction involving certain precious metals necessary to Delphi's production of catalytic converters as a sale, and in improperly accounting for a financing transaction involving certain batteries and generator cores necessary to Delphi's production as a sale. The false and misleading accounting for these two inventory transactions allowed Delphi to improperly recognize a material amount in cash flow from operations and to materially overstate its reported earnings per share and net income for the fourth quarter of 2000.
The Commission's litigation as to remaining defendants continues. [SEC v. Milan Belans, NO. 2:06-cv-14891-AC-SDP (United States District Court for the Eastern District of Michigan)] (Rel. 34-63578; AAE Rel. 3220; File No. 3-14166)
SEC Charges Former Executive Vice President of Carter's, Inc. with Financial Fraud and Insider Trading. Non-Prosecution Agreement Entered with Carter's, Inc.-First Under SEC's New Cooperation Initiative
The Securities and Exchange Commission today charged Joseph M. Elles, a former Executive Vice President of Carter's, Inc., the Atlanta-based marketer of children's clothing, for engaging in financial fraud and insider trading at Carter's between at least 2004 and March 2009. The SEC alleges that Elles's misconduct caused an understatement of Carter's expenses and a material overstatement of its net income in several financial reporting periods. While engaged in this misconduct, Elles also exercised options for the purchase of Carter's common stock and sold the resulting shares.
The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC's new cooperation initiative earlier this year.
The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles, then Carter's Executive Vice President of Sales, fraudulently manipulated the amount of discounts that Carter's granted to its largest wholesale customer in order to induce that customer-itself a large national department store-to purchase greater quantities of Carter's clothing for resale. Elles then concealed his conduct by persuading the customer to defer subtracting the discounts from payments until later periods and creating and signing false documents misrepresenting the timing and amount of those discounts to Carter's accounting personnel.
After discovering Elles' actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.
The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the Company's initial disclosure relating to the fraud on October 27, 2009, immediately after which the Company's common stock share price dropped 23.8%.
The SEC's complaint alleges that Elles violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles.
The SEC's investigation is continuing. [SEC v. Joseph M. Elles, Case No. 1:10-CV-4118 (USDC, N.D. Ga.)] (LR-21784; AAE Rel. 3219)
SEC Charges Investment Adviser With Securities Fraud and Other Violations
The Securities and Exchange Commission today announced the filing of a civil injunctive action against Alfred Clay Ludlum III of Wilmington, Delaware and his wholly-controlled companies, Printz Capital Management, LLC, a registered investment adviser, Printz Financial Group, Inc., and PCM Global Holdings, LLC (the Printz Entities), accusing them of defrauding investors and Ludlum's advisory clients out of approximately $852,000.
The SEC's complaint, filed in U.S. District Court in Philadelphia, alleges that from approximately June 2006 through June 2009, Ludlum raised approximately $700,000 from at least 27 investors through unregistered offerings of equity and debt securities in the Printz Entities. At least 21 of Ludlum's investors were his advisory clients, including some of his most trusting and financially unsophisticated clients. The complaint also alleges that Ludlum fraudulently obtained approximately $80,000 in loans from one of his advisory clients and misappropriated approximately $72,000 more from three advisory clients' accounts without their authorization.
According to the SEC's complaint, Ludlum told investors and his advisory client lender that their funds would be used for working capital and to grow and operate the businesses of the Printz Entities. In fact, however, Ludlum used most of the funds to support his lavish lifestyle, pay his personal expenses, and repay other investors. During the relevant period, Ludlum withdrew more than $445,000 from the Printz Entities' three main business accounts in the form of cash withdrawals, wire transfers to his personal accounts, and checks written to himself and his family trusts. In addition to these direct withdrawals, Ludlum also spent approximately $251,000 from the three primary Printz Entity business accounts on personal expenses such as bars and restaurants, rent for his luxury riverside condominium, lease payments for his car, groceries, and medical bills. Ludlum induced investors, including his advisory clients to whom he owed a fiduciary duty, to buy securities by promising superior rates of return, but failed to disclose that the Printz Entities earned little revenue and were unable to cover their expenses out of earnings. The Printz Entities failed to register their securities offerings with the Commission, even though no exemption from registration applied, and Printz Capital violated multiple provisions governing registered investment advisers.
The SEC's complaint charges Ludlum and the Printz Entities with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges Ludlum and Printz Capital with violations of Sections 206(1) and (2) of the Investment Advisers Act (Advisers Act), charges Printz Capital with violations of Advisers Act Sections 203A, 204, and 207, and charges Ludlum with aiding and abetting those Advisers Act violations. The complaint also charges Printz Financial with violations of Securities Act Rule 503(a) of Regulation D. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against Ludlum and the Printz Entities. [SEC v. Alfred Clay Ludlum III, Printz Capital Management, LLC, Printz Financial Group, Inc., and PCM Global Holdings, LLC, Civil Action No. 10-7379 (E.D. Pa)] (LR-21785)
Immediate Effectiveness of Proposed Rule Changes
The Commission issued notice of filing and immediate effectiveness of a proposed rule change (SR-CME-2010-01) filed by Chicago Mercantile Exchange under Rule 19b-7 of the Securities Exchange Act of 1934, which amends Chicago Mercantile Exchange's rules governing contract specifications for physically delivered single security futures. Publication is expected in the Federal Register during the week of December 20. (34-63551)
The Commission issued notice of filing and immediate effectiveness of proposed rule change (SR-NYSEAmex-2010-118) filed by NYSE Amex under Rule 19b-4 of the Securities Exchange Act of 1934 amending Commentary .11(a) to NYSE Amex Options Rule 915 to permit trading options on leveraged exchange-traded notes and broaden the definition of futures linked securities. Publication is expected in the Federal Register during the week of December 20. (34-63555)
A proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2010-066) to update a cross-reference in FINRA Rule 2232 (Customer Confirmations) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 20. (Rel. 34-63561)
A proposed rule change filed by NASDAQ OMX PHLX (SR-Phlx-2010-177) relating to options overlying QNET has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 20. (34-63562)
A proposed rule change filed by NASDAQ OMX PHLX (SR-Phlx-2010-178) to amend its Fee Schedule has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 20. (34-63569)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-NYSEAmex-2010-100) filed by NYSE Amex that establishes an electronic complex order auction and makes other changes to the Exchange's rules governing the trading of complex orders. Publication is expected in the Federal Register during the week of December 20. (34-63558)
The Commission approved a proposed rule change (SR-DTC-2010-14) filed by The Depository Trust Company under Section 19(b)(1) of the Exchange Act that will allow DTC to amend its Certificate of Organization to authorize an additional 1,750,000 shares of preferred stock and to designate such shares as Series A Preferred Stock. Publication is expected in the Federal Register during the week of December 20. (34-63567)
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